Lower Oil Prices to Weaken Credit Profiles of Oil-Exporting Sovereigns– Moody’s

The severity of the credit impact of lower oil prices on oil-and gas- producing sovereigns will vary from country to country, driving divergence in their creditworthiness, Moody’s Investors Service said in a report published Tuesday, March 24, 2020.

The outbreak of coronavirus has caused a reduction in the global oil demand and the breakdown of the Organisation of the Petroleum Exporting Countries (OPEC)+ agreement earlier this month has created a deep, although temporary, shock to oil prices.

“We don’t currently see the oil price decline as the outcome of a structural shift in the oil market, and fundamentals support our medium-term oil price assumption of $50-$70 per barrel,” said Alexander Perjessy, a Moody’s Vice President and Senior Analyst.

“However, in light of recent shocks, we have revised our assumptions for 2020 and 2021 down to $40-$45 and $50-$55, respectively, in light of these shocks.”

The sovereigns most vulnerable to lower oil prices in 2020-21 are those with the highest reliance on hydrocarbons as a source of fiscal revenue and exports, and limited capacity to adjust, the Moody’s report said.

The rating agency estimates that fiscal revenue and exports would decline by more than 10% of 2019 GDP in 2020 in Iraq and Kuwait compared with previous projections, in the absence of any adjustment, such as an increase in oil output.

In Oman, Qatar, Azerbaijan, Saudi Arabia, the Democratic Republic of the Congo and Bahrain, the fall would be 4-8% of GDP. The decline would be smaller, at less than 3% of GDP, in Russia, Kazakhstan, Trinidad and Tobago, Nigeria and Gabon.

The most susceptible sovereigns are Oman, Bahrain, Iraq, and Angola, where external vulnerability is high and capacity to adjust to the shock is limited, the Moody’s report added.

By contrast, stronger fiscal positions ahead of the shock buffer the credit implications for Qatar, Russia, Azerbaijan, Kazakhstan, and Saudi Arabia. And robust sovereign balance sheets will support Qatar and the United Arab Emirates, and, to a lesser extent, Kuwait, Azerbaijan, Kazakhstan, and Saudi Arabia.

The report also emphasised that large sovereign assets will provide a degree of resilience for some; the report said during periods of higher oil prices, many oil-and gas-exporting countries accumulated significant sovereign assets, which provide a degree of resilience during a period of lower oil prices.

How crude oil price decline affects most?

The price of Brent crude oil has plunged more than 60% since the end of 2019 to around $26 per barrel as of Wednesday, March 18, 2020, as a result of the spreading pandemic COVID-19 that has curbed global oil demand as well as the failure of the OPEC+ agreement on Friday, March 6, 2020, to cut production that was held in Vienna which only sent oil prices lower.

Lower prices will only test Saudi’s Leadership and it’s Aramco Company, the largest oil company in the world. Others to be affected undoubtedly include the US Shale oil producers as a result of the debacle in Vienna.